January 2012

UDI kicked off its 40th year with yet another sold-out Annual Industry Forecast Luncheon. Don Forsgren, UDI President and President of Intracorp Projects Ltd., launched UDI’s “More Homes for More People” initiative, explaining that lack of “affordable” housing, particularly in the lower mainland, is damaging to individuals, families, and business. The initiative is intended to start a conversation which aims to raise public awareness and explore solutions that can improve the attainability of housing for all British Columbians. Forsgren noted that meeting housing supply targets in BC is not enough to solve the affordability problems. Supply targets must be exceeded if the pent-up demand for housing and affordability are to be addressed. He said that the provincial government needs to redraw existing governmental and regulatory frameworks, reduce red tape and set an example for all municipalities in addressing the issue and taking part in the discussion.

Following on the trend from the 2011 Forecast Luncheon, the panel of industry leaders entertained the audience and left them with a confident outlook for the year ahead. All panelists agreed that risk still exists in the market following the world-wide financial crisis and the continuing economic and political problems in Europe. Nevertheless, Tony Astles of Bentall Kennedy LP, Anthem’s Eric Carlson, and Rossano De Cotiis of the Onni Group were generally optimistic, even when discussing potential changes to the BC political landscape, as they responded to the following questions from moderator Diana McMeekin of Artemis Marketing.

What are the three positive things that you forecast will influence your sector in 2012?

Tony is happy with supply for the industrial and office sectors for the next couple of years. He predicts that growth should be good in 2012 and that there will be increased and continued interest in investment grade income producing assets.

Eric predicted that world economic and political volatility will dial down a notch but will not dissipate entirely. He thinks that after the events of the last few years, British Columbians and Canadians are more accustomed to the current economic and political environment and will start to make the real-estate related decisions they’ve been putting off, such as buying new homes or properties and retiring to areas such as the Okanagan. He noted that US retailers are expressing renewed interest in Canada and predicted that business will follow.

Rossano doesn’t see a major turnaround in our future in terms of the economy. The three things he predicts as being influential in 2012 are interests rates, which will fuel demand for single and multi family housing, continued Asian investment and ongoing volatility in the stock market, which will result in people tending to favour real estate as a steady and generally reliable investment.

What are the things that keep you up at night that will influence your sector in 2012?

Eric is kept awake by a few things these days: a dram of scotch here and there; concern that market and economic volatility will continue to make it difficult for people to make the decision to invest in real estate; his nightmare of a crazy “End of Days” scenario that threads its way through the world, with the coup de grâce being the implosion of the Chinese economy (with the millions of completed but unsold condominiums not being absorbed). After suggesting that Eric should speak for him for the rest of the questions, Tony said that his main concern for 2012 is the potential for continued deterioration of the economic environment and a possible glut of office and industrial product by 2014-2016. His other concern arises from Bentall Kennedy’s focus on sustainable development. Tony worries about the surge in attempts to implement initiatives such as installation of geothermal heat sources, green roofs, and other similar green/sustainable projects. He notes that while laudable, all such initiatives need to be looked at critically prior to implementation because they are not applicable in all cases. Rossano said he’s generally sleeping well these days, but a theme that carried throughout his comments at the Luncheon was that the European debt crisis is a real concern, and if it reaches a tipping point both Vancouver and Canada will feel the negative effects.

What effect would an NDP government have on your business?

Frequent UDI panelist Rob Macdonald sent his annual political question in by email for the panelists. The question can be politely rephrased for our readers as: the splitting of the vote between the BC Conservative Party and the Liberals is a 90% certainty in the next election – what will happen to your company and the market if an NDP government is elected?

While a little squirming was evident, each panelist confirmed the importance of diversifying investments in a variety of markets rather than concentrating solely on British Columbia. Their respective companies’ intentions are to continue this practice going forward and each expressed the view that diversification will cushion them, in part, against any negative impact a change in government has on the economy.

In particular, Eric has mellowed from his stance in 2011 when he reported that the NDP “scares him to death” due to his view that they have exhibited a “profound lack of understanding” in the past of the concepts of capital, risk and creativity, and how the three come together. He said he has worked with NDP mayors in Metro Vancouver in the last 12 months, and his experience is that they are good people who care about their communities, just like their counterparts on the other side of the political spectrum. His view is that on the balance, an NDP government wouldn’t ultimately be as bad as some people suggest. He did, however, assure the audience that the NDP will increase taxes and regulation and will generally be annoying.

Rossano noted that his entire business career so far has been under the Liberal government and so he has not personally experienced an NDP government. His view is that to be successful, businesses have to be flexible and work with the government that is in power at the time.

According to Tony, economic growth and job creation are generated by many different factors. Those factors, and their impact on GDP and job growth, can change over time and with different circumstances, and government is only one of those factors.

How has Vancouver succeeded in weathering the global economic crisis so well compared to other areas? Will our market continue to be able to weather the storm successfully?

Tony and Rossano both agreed that Canada’s prudent banking laws were a saving grace for Vancouver and the rest of Canada when it came to weathering the crisis. Rossano noted his experience with the United States, which, he says, has a significantly different debt market than Canada, and has shown him that the approach of Canada’s banking industry is good for condo buyers and for developers seeking construction financing. Canada is not, however, insulated from Europe. He cautioned that a crash there will be a major issue for Canada and Vancouver.

Tony highlighted Vancouver’s continued property value stability and the fact that there are fewer big companies in Vancouver that needed to lay people off. He also noted that Vancouver is insulated from the industries that were most affected by the crisis, such as car manufacturing.

Eric sees Canada as the “True North strong and free”. Our strong national economy, strong central government, great resources, relatively good public education, healthcare and a friendly business environment are tremendous advantages. People and businesses move to Canada, and not just Vancouver, for this. His view is that Vancouver, and Canada, will continue to weather the storm due to these factors that distinguish us from other regions.

Do you see an end to the surge of Asian investment in our market and, if so, where will future demand come from?

The panellists universally agreed that they do not see an end to the infusion of Asian capital in our market. In addition, Eric noted that we already have the first generation of Asian immigrants within the market who are currently investing. Eric also believes that a lot of Chinese business capital is, and will be, coming to the market in the form of big money being used to buy oil and gas companies, as well as others. Rossano noted that the market has generally done a great job of making those immigrating to the Lower Mainland comfortable here, and like Eric, believes that businesses will now follow.

What is the forecast for the US market? When will it bounce back? What about other markets in Canada?

All three panellists are currently seeing signs of improvement in the US market. Rossano thinks that the investment market in America is presently okay, and is likely a lot better than television indicates. Rossano noted that there are some places in the US where homes should not have been constructed in the first place, and he does not see a recovery occurring in those locations. Rossano believes that the US market will see a big change over the next two to three years. Tony also noted that there seemed to be a big recovery in the US market last year, which generally indicates the beginning of improvement for the States. However, Tony assumes that the improvement will be bumpy, and agrees with Rossano that negative media coverage is a barrier to that recovery. In addition, Tony cautioned that the US continues to have foreclosure problems, and that the potential for a double dip recession in America still exists. Eric stated that we should never underestimate our neighbours to the South, and believes that the US economy is doing far better than the media would have us believe. Eric noted that while residential construction is currently on hold due to surplus inventory (leading to high unemployment figures), in three to four years time that surplus inventory will have been absorbed and a substantial number of new homes will then be needed.

In terms of Canadian markets, Tony observed that Toronto has seen some of its strongest growth ever in the last year and a half. The urbanization of the downtown core in Toronto has been positive, although the suburbs of Toronto are not as strong. Eric and Rossano agreed with Tony that the Toronto market is strong. Eric noted that immigrants are driving the Toronto market, and that office and industrial space are both doing well. In terms of the Calgary market, Tony believes that oil is driving supply in Calgary, with Class A office space in downtown Calgary having low occupancy rates and the industrial market generally being fairly solid there. Eric also views the Calgary market as doing well, although Rossano does not feel quite as bullish on Calgary.

What is the forecast for pricing and rental rates in 2012 with respect to each of your particular areas?

Tony believes that office rates in downtown Vancouver, Burnaby and Richmond will all increase, with Richmond seeing a slower rate of increase than Vancouver and Burnaby. With respect to industrial rates, Tony thinks that good product will see good absorption, while the absorption rate for bad product will not be great. For retail product, Eric observed that rental rates will depend on the region the product is in, with the urban core seeing an increase, and secondary markets fluctuating from increasing, to remaining steady, to potentially dropping in some areas. Eric noted that cap rates are likely to continue to fall, particularly in urban areas. In terms of the residential market, Rossano sees rents going up, and in terms of residential pricing, Rossano noted that it will depend on area, but pricing will generally be quite balanced.

Where are the best development opportunities in the year ahead?

In terms of the retail market, Eric observed that the opportunities are greatest in the downtown core, and that Vancouver, Burnaby, North Vancouver, and Richmond are all good bets. Eric noted that there still is not a lot of retail land available at reasonable rates. Rossano believes the best residential development opportunities exist along transportation corridors and in Richmond, where the Asian investor is still buying. For office product, Tony sees potential in the downtown core between now and 2015; however, he noted that the number of office developments planed for 2016 and beyond will result in too much product for the market to bear. During the course of 2012, Tony sees demand for office product in central Vancouver, and otherwise close to transit for mixed use product.

What is hot and what is not in particular market sectors?

On the residential side, Rossano joked that wide-planked hard wood floors are hot, as is anything green, and that overpriced real estate is not hot. He also noted that Onni recently had to combine neighbouring units in a development to create larger units for purchasers, perhaps suggesting that larger units may be hot in coming years. From Tony’s office and industrial perspective, proximity and access to the SkyTrain is hot, while suburban office space is not hot unless it is linked to the SkyTrain or there is access to the it by way of shuttle. In the retail/commercial sector, Eric feels that big mixed-use projects with a residential tower and podium are hot. He also sees smaller scale mixed use “high street” type developments with ground level retail along the major corridors as being hot, but notes that these projects are often complex and time consuming on the front end and not a lot of municipalities or people have experience in putting them together.

What will happen to your market sector (and liveability) due to the affordability problem for young people that can’t get into the market?

Tony predicts that younger people will rent more or move to suburban locations with smaller and less expensive units being built near transit. Eric acknowledged that we need to work towards getting costs down and reducing red tape in order to solve the affordability issue. However, he was also of the opinion that houses are expensive and people need to get over this and realize that life changes and evolves. While we might all want to live in a $4 million house in Kerrisdale, the reality is that younger people will have to move outside of the urban core to places like Port Moody, where developers are doing “cool things” with smaller spaces. From the retail sector’s perspective, smaller living spaces are a good thing as they force people to leave their small units and meet at coffee shops or other retail spots. Rossano confirmed that the affordability problem for younger people is a real issue and agreed with Tony that in the short term young people may look to rent or move to the suburbs. In Rossano’s opinion, a solution to this affordability problem will require the government to get involved and mandate that developers build a certain proportion of affordable housing units into their projects (e.g. 20%).

What green technology have you adopted that has caught your attention and given people the most bang for their buck?

“None” was the comment from Eric, who felt that a proper efficient design was the key to “green technology”. He said that, while green technology is hip and cool, people only want it if it’s cheap. If people have to pay for green technology they would rather do without it. Eric also stated that if people want more bang for their buck, developers and consumers can look to densification and live in smaller spaces and ride their bike to work or take public transit. Rossano echoed the sentiments of Eric, saying that people don’t want to pay for green technology. He said that Onni is currently working with reusing rainwater and using sunshades and more effective glazing. Rossano noted that LEED has done a great job of marketing, but there needs to be more of a middle ground. For the office sector, Tony said that the key is to get the outside right or get the people inside doing it right. Triple-glazed windows, low-flush water retention toilets and energy saving measure make sense and reduce operating costs for tenants. If the tenants themselves follow sustainable practices and turn off lights and computer screens and compost their waste, it takes a huge load off the building and it’s free.

You are all successful leaders in your field – what has you most excited about 2012 and beyond and what will your focus be?

Tony is stoked about Bentall’s development pipeline for the next 2 to 10 years, with a number of mixed-use products popping up along the transit corridors. He also commented that real estate is a hard asset and an anchor in the markets and that, with people continuing to be annoyed with the volatility of the market, they will move towards income producing properties, which are a defensive asset. Rossano said that Vancouver is Onni’s home base and that, while Onni is still excited about development in Vancouver, he also sees great opportunity in a number of US markets in 2012. Eric commented that when he looks at the world leaders he thinks they are dealing with problems properly and that they will eventually solve the current financial issues. Technology has him excited, as does “liveability” and the cool, fun product that Anthem has coming down the pipeline that will provide consumers with an exciting place to live.

Apartment sales rise

The numbers are in: sales of apartment blocks in the Lower Mainland totalled 110 last year, up from 90 in 2010 and the greatest number of sales since 2007. While the total volume of sales – $577.1 million – didn’t match the tally of $648.5 million achieved in 2005 (when 162 properties changed hands), the per-suite price continued its “relentless climb” to $175,741.

All this is according to apartment brokers David and Mark Goodman at HQ Commercial Real Estate Services Inc. HQ principal David Goodman attributed the activity to low interest rates and investors seeking good returns.

“It’s one of the few asset classes where you can almost get an immediate increase in value if you’re a smart guy,” said Goodman, who expects increased transaction activity in 2012.

Buildings are trading at half their replacement cost, allowing savvy buyers to snap them up and make changes that can materially affect the market cap – a key measure of the return investors anticipate.

Apartment buildings, which average close to 60 years old in Vancouver and typically have regular turnover, allow improvements to be made relatively quickly.

“Of the numerous buildings we’ve sold in the past few years, many of them have been targeted with the expressed intention of optimizing [their] value quickly, in a year or less. Something that’s very difficult to do with other asset classes,” Goodman said. “You can’t just move it from a 4 [%] cap to a 5 [%] cap in one year in most other investments. … The big boys can do it with shopping centres, but it’s a five-year plan.”

Some perspective

What makes Vancouver attractive to investors, however, isn’t what makes for good returns. The value in the city’s notoriously tight rental market comes from the fundamental value properties have in any constrained market, not necessarily cash flow.

Indeed, crunch the numbers from Canada Mortgage and Housing Corp.’s latest rental market survey and Vancouver leads in neither increase in rents (thanks to provincial controls on annual increases within tenancies) nor low vacancies. Vancouver may boast high rents, but CMHC research indicates that increases in those rents averaged just 2.3%, with the biggest gains seen in studio and two-bedroom rents. The overall average rent in the Vancouver region is $1,027.

Similarly, while segments of the local rental market may experience vacancies of less than 1%, vacancies in the market as a whole average 1.4% – on par with Toronto, but still well above such locales as Estevan, Gander or Thompson, Manitoba (vacancies: zero).

Housing starts healthy

The latest CMHC figures also show that a conservative estimate has given way to better-than-expected starts in the Vancouver housing market.

A year ago, the CMHC was reticent to offer any firm estimate on where housing starts were heading in 2011.

“With housing demand softening and increased supply on the resale market, housing starts are expected to remain flat in 2011,” the CMHC remarked in its Housing Market Outlook report for Fall 2010.

According to a statement that November from senior market analyst Robyn Adamache, “Homebuilding will increase modestly next year as developers seek to add to the stock of housing to accommodate approximately 16,000 to 18,000 new households each year.”

The housing outlook conference last November was a bit more upbeat. It forecast 17,000 starts for 2011, and 18,000 for next year.

The actual 2011 tally was 17,867, which was driven largely by multi-family projects that yield value for consumers and better margins for developers.

This pegs the five-year average at 81,750 units – well below the 90,000-plus seen in the late 1980s and early 1990s, but still well above the dark days a decade ago, when the five-year average was a 1960s throwback at 55,570 units.

Click here to download the PDF version of the full article in Business in Vancouver January 17- 23, 2012.

David & Mark Goodman

The final numbers are in!  Our report 2011—The Year in Review provides an in-depth analysis of the Greater Vancouver apartment market.  We looked at this past year’s performance vs. 2010, published the sum total of all 2011 building transactions,  reviewed CMHC’s rental market report and commented on the contentious matter of rent control.

Download the exclusive report here >>

The matter of rent review/rent control has become a personal fixture amongst BC’s
rental apartment industry.  Imposed and modified by previous Provincial
Governments, its implementation has proved anathema to landlords and has long
been regarded as one of the key obstacles to the expansion of rentals by supply
advocates.  New purpose-built development remains uneconomic as
politicians find it expedient to shift the onus and the burden onto the backs
of apartment owners with arbitrarily capped rent levels.

In a recent Wall Street Journal op-ed, NYU Law Professor Richard Epstein comments
on a New York City landlord’s challenge to the city’s long-held rent control
and stabilization laws. The Fifth Amendment to the U.S. Constitution provides
that “No person shall be deprived of life, liberty, or property without due
process of law; nor shall private property be taken for public use, without
just compensation.”  The op-ed suggests that rent control collides with
the last prohibition, the “takings clause.”

While our Canadian Charter of Rights and Freedoms declines to enshrine similar rights
with respect to private property, the BC Legislature has recognized and
codified such rights by way of the Expropriation Act.  Much like the Fifth
Amendment, this Act allows the government to unilaterally claim an interest in
private property provided that the owner is compensated to the extent that his
property rights have been compromised. In particular, Section 31 of the Act
specifically requires the compensation to be in accordance with “market value”,
quite akin to the Fifth Amendment’s call for “just compensation”.

Indeed, the BC Legislature, by virtue of the Expropriation Act, contemplated and
protected a property owner’s economic freedom by providing for full value
benefits should that freedom be infringed. How, then, can this same government
justify a forced suppression of fair market value rents? One may question
whether the imposition of rent controls on a landlord is nothing less than a
pseudo-expropriation, except without, as Section 31 of the Act so rightly
requires, market value compensation.

A legal challenge could prove interesting…

A special thanks to Howard Flinker of New York City for bringing this to our attention.

When Helmut Pastrick took the podium to address Metro Vancouver developers in November, the chief economist at Central 1 Credit Union warned of “considerable headwinds” facing the commercial real estate market in 2012. His outlook for this year was far from inspiring.

“Obviously, Europe is the main risk, but I think B.C. and the Metro Vancouver area economy will perform at a kind of middling pace,” Pastrick told the NAIOP meeting.

Some B.C. commercial realtors say the headwinds are already howling, and it is a cold wind indeed.

“The market is frozen,” said a Re/Max commercial realtor on Vancouver Island. “Vendors are fine to sit and wait because they have no vacancies.” Vancouver Island commercial real estate sale volumes through MLS were down more than 50 per cent in November of 2011, compared with a year earlier, reports the BC Real Estate Association, and most realtors say it is lack of product, not buyers, that has cooled activity.

But sell signals are flashing, even from Vancouver’s rock-solid multi-family and industrial sectors, a sign that some insiders believe this may be a year to cash out before things get any worse. As one leading commercial realtor quietly told Western Investor: “Prices have peaked. I am telling my clients to sell, and sell now.”

The valuations are up in all sectors. In a report on the Metro Vancouver industrial sector over the past year, Grover, Ellis & Co. Ltd., found that the average per-square-foot sale price had shot up 22 per cent.

“People are bidding up and paying fairly ridiculous prices right now,” said Larry Dybrig, president of Grover Ellis.

In the multi-family sector, the average price of a Vancouver apartment building has soared to more than $257,000 “per door,” according to a study by HQ Real Estate Services Inc. Even suburban markets are seeing record-high prices, despite skinny capitalization rates in the 3 per cent to 4 per cent range. It means now may be the time to be liquidating.

“Common sense dictates that if you are contemplating selling your asset, there would not be a better time than now,” said David Goodman, a multi-family specialist with HQ. “Demand remains robust. How long will the seemingly insatiable appetite for real estate remain with these historically low cap rates?”

Click here to download the PDF version of the full article in Western Investor January 2012.

Apartment buyers, vendors, appraisers and other commercial-realty professionals in B.C., as well as thousands more worldwide, regularly scan The Goodman Report. That’s the physical and electronic newsletter David and Mark Goodman publish while maintaining a $125-mil-lion gross yearly sales average as co-principals, with David England and Grant Wilson, in HQ Real Estate Services.

Mark, 34, wasn’t supposed to join his dad in business a decade ago. Then again, the latter wasn’t supposed to be a B.C. realtor. But when 1970′s October Crisis put anti-terrorist armed troops on his native Montreal’s streets, the elder Goodman quit the schmatta business, and he and artist-wife Lilian Broca pointed their Rover TC 2000 car westward.

Only brothers Arthur and Henry Block answered David’s application letter to major realtors, whereupon he began a Richmond-based, 22-year sales career that saw him top the firm’s Canadian residential sales.

But Goodman wanted to “break into Shaughnessy, and a [business] card from a Mennonite firm just didn’t cut it.” So he printed 10,000 copies of a newsletter showing him wearing lots of hair and a checkered sports jacket visible from space. Predicting a four-per-cent home-value increase for 1978, the single page urged buyers or refinancers to “take advantage of 10 to 10-1/4% mortgage rates.”

“All of a sudden, the phone started ringing,” and five successful years ensued. But he longed for commercial business “void of emotion. It’s all numbers – not Mrs. Smith disliking the curtains or [the house] is too close to her in-laws.” But how to get his foot in that door?

Bingo! Another newsletter for sons Eric and Mark to spend hours stuffing into envelopes. “The first thing I did,” Mark now says of leaving an internal bartering job with the Jim Pattison Trade Group to join David, “was automate the envelopes.”

The newsletters worked, though. David got the late Jack Poole’s Daon Development firm to pay $7 million for a Grosvenor-owned 80-unit Burnaby rental-strata building worth $35 million today. Of the material he circulated, “Nobody from the street had served up hard-core data that would help [investors] optimize their assets, ” David said. “It was information the reader couldn’t normally get.”

Rival newsletters rose and faded. Of staying the course, Goodman said: “Fortunately, madness runs in our family.”

Common sense may, too. Augmenting papa’s single-market know-how, former barterer Mark had learned “profit mar-gins from bottled water to radio time.”

He’d also “used the Inter-net to move razor blades from Bombay to Israel.” Now he used it to generate 50,000 subscribers globally for The Goodman Report’s e-edition. “It’s a beast we can barely control now,” he said.

Still, he learned a key real-estate lesson while calling another agent for information during his first day on the job. “‘Mark, I have to ask you one question,’ he recalls hearing. ‘Am I cooperating?’

“That’s when I realized there are no freebies in this business,” he said. Other than The Goodman Report, of course.

Click here to download the PDF version of the full article in The Vancouver Sun December 8, 2011.

Going national

Rental apartments may be a challenge to build in Vancouver, but this isn’t the only city grappling with the issue. During interviews for last week’s Business in Vancouver Full Disclosure feature story “Apartment blocked” (issue 1150; November 8-14), apartment broker David Goodman observed that building purpose-built rentals is a challenge right across Canada – save for perhaps a few sites in Ontario.

The national need for affordable rental housing – not just condos or infill coach houses – has now spawned the Canadian Rental Housing Coalition, whose founding members signed a charter in Vancouver last week calling on governments and the private sector to work together to address the issue. Signatories to the charter include Maureen Enser, executive director of the Urban Development Institute; Marg Gordon, executive director of the B.C. Apartment Owners and Managers Association; and M.J. Whitemarsh, CEO of the Canadian Home Builders’ Association of BC.

While the coalition’s founding members hail solely from B.C., Vancouver Mayor Gregor Robertson signed the document as chairman of the Big City Mayors Caucus of the Federation of Canadian Municipalities, and the Right to Housing Coalition of Manitoba has also endorsed the coalition’s charter.

“We need to work collaboratively and cooperatively to solve this problem. Isolated efforts aren’t going to cut it,” said Enser, who co-chairs the coalition with New Westminster Mayor Wayne Wright.

The charter calls for, among other things, a “National Economic Strategy” to foster rental housing, reinstatement of federal tax incentives to stimulate construction, which were eliminated in the 1970s and the release of government land for rental construction.

Enser said rental housing is an important economic issue, because it’s linked to questions of affordable housing and because construction means jobs. She believes the coalition will be more successful than two others she’s been involved with in her career because it has a broad base of support. The coalition became a national initiative following its organizers’ June 22 presentation to the Canadian Housing & Renewal Association in Regina.

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We’re No. 2

Vancouver is second to Toronto among Canadian cities and fifth in North America so far as its ranking among investors goes, according to the annual Emerging Trends in Real Estate report by PricewaterhouseCoopers for the Urban Land Institute.

But second place isn’t a bad thing, given the rest of the world. Speaking in Vancouver on November 3, report author Jonathan Miller observed that the U.S. isn’t going anywhere, and asked, rhetorically: “Don’t you have to be concerned if Europe continues in its real problem phase?”

You’ve got it good, Vancouver – and even if a slowdown in China cools the economy here, the local market will remain tight with few sites for development and the immovable constraints of mountains and sea.

“You’ve got very, very tight markets, and I think you should feel good about your prospects,” Miller said.

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North Shore industrial real estate powers up

A constrained land supply and lack of new product mean times are good in Vancouver industrial markets – notwithstanding an “uneasy balance” Avison Young notes between supply and demand, driven in part by circumstances on the world stage.

“Most occupiers of industrial real estate are keeping an eye on the situation in the United States and Europe along with local conditions while considering a purchase or lease of additional space,” remarked Avison Young associate Michael Farrell in a recent press release. “The resulting mixture of positive and negative economic indicators has led to and will continue to drive the cautious optimism we are seeing.”

But if there’s cautious optimism in the region as a whole, the real winner appears to be in North Vancouver, where industrial sales are heading for the greatest volume since 2006. The number of deals has dropped, but investors are so keen to get what’s available that buyers are willing to pay healthy sums for a piece of the action.

“The prices are continually escalating, and there’s buyers continually buying,” said Matt Thomas, an associate who works the North Shore. Sale times have diminished to one month today from three to six months two years ago. Sale prices for strata have risen to $300 a square foot – “unheard of in any other market.” This has prompted vendors to come to market, feeding demand just enough to keep it coming.

Click here to download the PDF version of the full article in Business in Vancouver November 15-21, 2011.

The Golden Age of Greek Tragedy written some 2,300 years ago is considered one of the foundations of literature, whereas the current Greek tragedy could be the foundation of a major worldwide catastrophe. What is most concerning is that this landscape changes daily.  For weeks the EU (European Union) led by Prime Minister Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany thought they had a deal (the “European Plan”). The EU Plan was a package of measures designed to support Greece’s tenuous balance sheet and, in effect, write off 50% of all their debt, with the Greeks themselves absorbing a further 25% through an austerity program. The markets responded positively, the EU stabilized its currency (Euro) versus the US dollar, the Canadian dollar rose versus the US dollar, commodities seemed to have levelled off and we collectively took a huge sigh of relief knowing that the bungee cord had not snapped.

Then the Prime Minister of Greece, George Papandreou, trying to hold onto power, pulled a rabbit out of the hat and decided that democracy demanded that the people of Greece should vote for this bailout plan.  One does not require an understanding of the Greek culture in order to appreciate the seriousness of this referendum. Apparently, very few pay income tax in Greece, or if they do, it is a very small amount. As a result, their government continually borrows to pay its bills, ergo, the problem that they are currently in.

This bailout plan is so convoluted and expensive that it requires Europe’s biggest banks to recapitalize (to cover their losses) to the tune of 148 billion Euros by June 2012 so they can weather Greece’s losses.  As for Greece, the EU expects them to pay dearly.  What the EU wants, besides the reduction of the civil service, which in itself is a form of disguised unemployment, is a dramatic change in how the Greek’s view their economy. We all know that Europeans take a slightly different view of democracy compared to North Americans.  When France tries to decrease its farm subsidies by as much as one cent per litre of milk, every farmer in France drives their tractor through Paris until the government changes its mind.  Greece is no exception. There were riots in the streets, clashes with the police and general chaos, but the government there seemed to, at least up until last week, decide on a path that would take the country out of their morass.  A referendum, you ask?  Just ask our own Christy Clark about referendums on taxation and see where that leads to.  Then, two days later, Papandreou changes his mind–no referendum.  The problem is solved, the markets respond and we go on from here.

But not so Fast

Next up—Italy.  The day that Greece retracted its referendum, Italian bond yields hit a Euro-era high.  As of today, Italy’s bond yields are still increasing even with new leadership in place.  Ireland, Portugal and Spain have all said that once 10-year Government Bonds hit 6.5%, they will need immediate help.  These yields of around 6.5% are in the yield ballpark which could trigger another bailout.

What does this have to do with assets in Vancouver?

Directly, very little; indirectly, a tremendous amount.  The world is spooked.  People are looking for safe harbours.  For example, U.S. Treasury Bills this week became very short in supply as demand rose, driving their prices up and their yields down further.  The EU rolled back their already low interest rate to try and stabilize the markets.

What could possibly happen if they solved the Greek crisis?

The next crisis is around the corner.  Italy, Portugal, Spain and the United States you say?  Greece’s problem is but a postage stamp in comparison of what may yet happen.  The bottom line: European banks and likely both American and Canadian banks will need massive recapitalization. This capital will have to come from somewhere and that is the world’s major dilemma.

What would happen if at the end of the day the EU does not bail out Greece or during the process, reneges? 

• Greece will be asked to leave the EU and probably be given about one month to get their own currency back in place
• The drachma – or whatever the Greeks decide to call their new currency – will fall in value immediately
• The country will not be able to pay its civil servants, its pensions or any of its obligations overseas
• Greece will declare a bankruptcy that could lead to massive unrest within the country
• Major banks worldwide will need additional infusions of capital in the billions of dollars.

As difficult as the pain the Greek people are feeling with the restrictions and impositions of the EU, the pain of not accepting the bailout measures would be far worse.  The old expression of short-term gain vs. long-term pain could not be better said regarding the modern Greek tragedy.

I am no maven, but there are reasons to be concerned. Common sense dictates that if you are contemplating selling your asset, there would not be a better time than now.  Demand remains robust.  How long will the seemingly insatiable appetite for real estate remain with these historically low cap rates?  If you are at all nervous about what is going to happen next week, the week after or over the short term, contact The Goodman Team at 604.714.4778.  We are active, we are busy and we are selling apartment buildings.

In all my world travels, I have rarely witnessed a civic government that is as bad as the one we have now in the City of Vancouver.  The litany of poor governance is shocking:

• Complete mismanagement of the Olympic Village where we now have the most expensive social housing in North America at $600,000 per door, coupled with a staggering loss of taxpayer’s money, in the $400 million range;

• Instead of supporting economic vitality in Vancouver’s critical industries, we get Gregor’s backyard chicken coop economic strategy;

• We have horribly designed, multi-million dollar dangerous bike lanes that have created substantial harm to the downtown business community that were rammed into place as a phony “trial”;

• Property taxes on small business are so unfair that even Gregor’s own juice company moved out of town;

• Complete lack of accountability over the Stanley Cup riot where Gregor, as chief cheerleader of large downtown view sites, invited over 150,000 people downtown but refused to increase the police budget as requested by the Police Chief;

• We have parks and City boulevards that are going uncut and community swimming pools that are falling apart while we fund various goofy social engineering projects like taxpayer funded wheat fields;

• We are ignoring the basic and important work of local government while civic employee morale drops to an all-time low;

• And now Gregor is supporting a tent city in downtown Vancouver, at a cost to the taxpayer of over $600,000 and growing daily.

Enough is enough.

Like a growing number of Vancouverites, I believe it’s time for a change that puts common sense back into our local government.  It’s the reason I have decided to support of the NPA Party with a very significant donation and am asking you to do the same.

The NPA Team is being led by Suzanne Anton who, as a former Crown Prosecutor, will bring both integrity and financial responsibility back to City Hall.  You can review the whole NPA Team of candidates on the website www.npavancouver.ca.  As a group, the NPA Team of business-like individuals offers a highly credible alternative to the existing City Council who have really let the citizens of Vancouver down.

As the NPA Campaign Fundraising Chairman, I really hope I can count on you for financial support.  Cheques should be made payable to “Vancouver NPA 2011 Campaign” and may be sent in care of myself at the 11^th Floor, 938 Howe Street, Vancouver, BC  V6Z 1N9.

I would be happy to get together with you personally to discuss the campaign as your support is integral to restoring common sense government to the City of Vancouver.  In addition, I would appreciate it if you would forward this correspondence on to any of your friends or acquaintances who you think might support a much needed change at City Hall.

At the end of the day if we do not have good government, we have nothing.

• Replacing Vancouver’s aging rental stock to maintain affordable housing options is going to be financially painful and politically distasteful
• Unless neighbourhoods accept higher building densities, there will be no new development and homeowner taxes will continue to climb

January 2007: Vancouver’s condo market was approaching fresh peaks, and aging apartment blocks in the Vancouver-Fairview riding of rookie MLA Gregor Robertson were slated for redevelopment as condos commanded between $525 and $575 a square foot. In the previous 12 months, Polygon Homes Ltd. and Delta Land Development Ltd. had begun building or marketing new projects, and Robertson’s office began fielding calls from local residents about the perceived threat to the local rental stock.

“When those [the original] apartment buildings were demolished, that’s when we started to get more calls and more people stopping by,” he told the Georgia Straight at the time.

Conventional wisdom held that investors would fill the gap in rental stock created by the demolition of rental apartments. But the loss of rental units was considered serious enough that the city later that year imposed a demolition moratorium on apartment units in RM-3 zones like South Granville, home to most of the city’s walk-up apartments.

Any rental units demolished had to be replaced one-for-one in new developments.

Meanwhile, the question of affordable and adequate housing became one of the key horses in Robertson’s stable. He rode it into the 2008 mayoral campaign, declaring war on homelessness and wooing voters with promises of policies that would support and encourage rental housing.

But the most successful initiatives have been in the area of homelessness, also a concern of policy-makers in Victoria.

Building rental units has been harder to achieve, because it requires higher neighbourhood density. Yet without density, it’s impossible to increase the number of units Vancouver can offer potential residents. And with supply lagging behind demand, up go rents and prices. Vancouver now boasts the highest multi-family rents in Canada, with the Canada Mortgage and Housing Corp. pegging one-bedroom rents at $934 a month and two-bedroom units at $1,181 a month.

Rental renewal demands higher density

“There has unfortunately been no new move afoot to rationalize this need to densify in RM-3 areas. Virtually none,” said David Goodman, principal of HQ Real Estate Services Inc. and a veteran apartment broker critical of the city’s handling of RM-3 zoning.

“The present council is committed to maintaining the status quo.”

It’s not for want of opposition, with Goodman among the proponents of change.

NPA mayoral candidate Suzanne Anton told the annual convention of the BC Apartment Owners and Managers Association last month that she would end the moratorium on apartment demolitions in RM-3 zones and permit densification that allows rentals and condos.

But allowing condo construction raises the spectre that rentals will eventually be squeezed out.

Logic dictates that condos are so lucrative relative to rental apartments that developers wouldn’t be able to help themselves – even though condos are a classic ingredient of mixed-use developments across the city, from Woodward’s to PCI Group’s Crossroads project at Broadway and Cambie, and into suburbia. Yet without condos, or some other means of being repaid for their investment, a developer can’t afford to build rental units because rents, while among the highest in Canada, are out of line with Vancouver land costs. The average age of the city’s rental stock is about 58 years old, but rents don’t reflect current land economics.

“A developer’s going to lose millions of dollars if he builds strictly rentals, because you’ve got to pay so much for the land,” Goodman said. “We’ve got the best developers in Canada right here. They could do anything. But they still haven’t found the magic bullet: How do you build rentals and not lose your shirt?”

Cost is a familiar question to Michael Geller, president of the Vancouver-based Geller Group, which consults on real estate projects and is a small-scale developer. Geller was previously CEO of SFU Community Foundation’s UniverCity project on Burnaby Mountain, where incorporating rental units was an important goal.

“It’s hard to cover off the cost of building new rental accommodation through market rents, especially if you have to pay something for land,” he said. “Some people can do it if they have a longer-term horizon.”

To get around the question of land costs, Geller sees opportunities in projects that effectively retrofit existing buildings with rental units through renovations or additions, or new kinds of construction that maximize densities. One of the Geller Group’s ventures is Laneway Cottages Inc., which aims to develop laneway homes.

Boosting densities doesn’t necessarily mean adding Godzilla-like towers that make neighbourhoods feel as if they’re under attack. The legalization of secondary suites and laneway housing have both contributed to higher city densities than existed five or 10 years ago.

“We are generally increasing densities as time goes by,” Geller said. “What was considered the maximum density in the past may well be considered a more modest density today.”

The densities proposed along the Cambie Street corridor, where the city hopes to ensure 20% of new units are rentals, “would have been unheard of 10 or 20 years ago.”

“One way or another higher density housing is coming,” he said. “How can you ensure some of it is rental?”

Advocating rental incentive initiatives

This is where incentives play a role. The linchpin of the city strategy to address the aging stock of rentals in Vancouver is the STIR (short-term incentives for rental) housing program, a two and a half year initiative launched in 2009. Potential incentives included increased density, reduced parking requirements and the waiving of development cost levies on rental units.

“Without the density bonuses, the STIR program is just not possible, because it’s a money-losing proposition for any developer to build rental units in Vancouver,” said Will Lin, president of Rize Alliance Properties Ltd.

But after considering STIR for On Que, a 48-unit project on Broadway at Quebec Street, Lin opted against participating because it was difficult to justify increased density on a site that was already ready for development (it was previously owned by Holborn Properties Ltd.), and STIR would have placed a restrictive covenant on participating units by designating them as rental. It made more sense to develop the project as a condo, hold back 13 units and rent them until market conditions allowed – not unlike what the city has done with Olympic Village units.

“The rental part of the whole equation is just a temporary measure to be able to hang on to these units financially,” Lin said, noting that the return on rental units relative to their market value is a “ridiculously low” 3% to 4%.

But rental units are part of the equation at the controversial tower Rize Alliance plans for Kingsway and East 10th Avenue, where 15 are designated as part of the project’s community amenity contribution (CAC).

A similar arrangement is how the city’s plans to provide purpose-built rentals along Cambie Street.

The project has yet to receive final approval, however, and community opposition to its height means it could include fewer units. Opposition to the original plans for a 32-storey tower has reduced its height to 19 storeys, in turn cutting rental units to 15 from 40.

Greater density would have allowed a larger contribution of units to the city’s designated rental stock, but community opposition to other aspects of the project nixed it.

However, as Lin pointed out, the rental component wasn’t a priority for residents. Compared with other aspects of the project, it attracted little attention – positive or negative. He attributed that to respondents being property owners in the neighbourhood rather than tenants.

Rental housing simply isn’t their concern.

Status quo not sustainable

Gary Pooni, president of Brook Pooni Associates, believes rental housing should be everyone’s concern because of its close connection to affordable housing.

The high cost of home ownership in Vancouver, the country’s least affordable city for home buyers according to regular reports from RBC Economics, means people remain renters longer in Vancouver than they would elsewhere.

“There’s a number of young professionals who are probably renting into their mid-30s when they’ve been in their respective careers for maybe 10-plus years,” Pooni said. “That puts an additional strain on the rental housing supply.”

Building more affordable units comes back to the question of density. Per-unit costs drop when developers can do more with a site, and developing more units helps keep supply in tune with demand so prices remain moderate.

And government has to lead the charge.

“Where neighbourhoods are reluctant to accept change, it’s going to take strong leadership from our municipalities – not just Vancouver – to approve some of these projects and ensure there’s a good level of density that’s attained on some of these projects,” Pooni said.

It’s a hard message, one less palatable to voters than promises of housing that’s affordable. But ultimately, someone has to pay for affordability – whether it’s through CACs, denser neighbourhoods or lower margins on developments.

The alternative may be far worse, not just for tenants but for property owners.

Bing Thom, principal of Bing Thom Architects, believes densification of existing rental properties in the RM-3 zones and even single-family neighbourhoods is essential if housing – and property taxes – are to remain affordable.

“People on the West Side, the single-family area, [must be] told, ‘If we don’t create more density in your neighbourhood, your taxes are going to go up three to four times.’ Because that’s what’s going to happen – the tax base is gone in the city,” he said.

“But nobody has said that; nobody has come out and said, ‘It’s either that or status quo – and [status quo] is not sustainable.”

Click here to download the PDF version of the full article in Business in Vancouver November 8-14, 2011.